We are committed to developing technologies that help advance the practice of resuscitation. With products for pacing, defibrillation, circulation, and fluid resuscitation, we provide a comprehensive set of technologies, including Real CPR Help® and See-Thru CPR ® that help clinicians, EMS professionals, and lay rescuers resuscitate sudden cardiac arrest or trauma victims. We also design and market software that automates the documentation and management of both clinical and non-clinical information.

We intend for this discussion and analysis to provide you with information that will assist you in understanding our consolidated financial statements. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. This discussion and analysis should be read in conjunction with our consolidated financial statements as of March 29, 2009 for the three and six months then ended, and the notes thereto.

Sales for the three months ended March 29, 2009 decreased 7%, as compared to the comparable period in the prior year. There were multiple factors affecting our results this quarter, which include the challenging capital equipment spending environment in the North America hospital market and the impact of a strengthening US dollar on our sales denominated in a foreign currency. The slowdown in capital equipment sales in the North American hospital market was partially offset by increased revenues from our LifeVest®, data management, and AutoPulse® products.

With respect to the strengthening US dollar, foreign exchange fluctuations had a negative impact on total second quarter revenues of approximately $5 million as compared to the comparable prior-year period, and had a negative impact of approximately $4 million on our operating income in the second quarter as compared to the same prior-year period. Of the $5 million impact on revenue, approximately $2 million is related to the Canadian dollar within our North American operations, while the remaining $3 million is reflected within our international operations related to the British Pound, Euro, and Australian Dollar.

During the quarter, we initiated a voluntary worldwide field corrective action on our AED Plus automated external defibrillator. The batteries in the AED Plus are not performing as expected. A software upgrade is available for download from our website that will detect the potential battery problem. If defective batteries are detected, the user will be prompted by the AED Plus to install new batteries. The corrective action applies to approximately 180,000 units. During the quarter ended March 29, 2009, we accrued approximately $500,000 as the expected cost of the corrective action. All actions and notifications are being coordinated with the U.S. Food and Drug Administration.

Three Months Ended March 29, 2009 Compared To Three Months Ended March 30, 2008

Sales

Net sales by customer/product categories are as follows:





                                                      March 29,      March 30,
(000's omitted)                                         2009           2008        % Change
Devices and Accessories to the Hospital
Market-North America                                 $    17,484    $    27,865         (37 %)
Devices, Accessories, and Data Management
Software to the Pre-hospital Market-North America         47,145         40,956          15 %
Other Products to North America                            5,421          5,779          (6 %)

Subtotal North America                                    70,050         74,600          (6 %)
All Products to the International Market                  22,658         24,560          (8 %)

Net Sales                                            $    92,708    $    99,160          (7 %)

Net sales decreased 7% for the three months ended March 29, 2009, compared to the three months ended March 30, 2008.

Sales to the North American hospital market decreased approximately $10.4 million, or 37%, compared to the same period a year ago. This decrease primarily reflects curtailed spending by hospitals. We believe hospitals are constraining capital spending in response to the general economic downturn. We believe that the curtailed spending has delayed customer purchases. Because professional defibrillator products are standard-of-care, we believe such spending has been delayed rather than permanently cancelled. The decrease was also attributable to a smaller volume of US Military/Big Government sales of approximately $1.4 million compared to the prior-year quarter of approximately $3.7 million.

Sales to the North American pre-hospital market increased approximately $6.2 million, or 15%, compared to the same quarter in the prior year. The increase in North American pre-hospital market sales was primarily the result of increased volume in LifeVest revenue, which increased 78% to $10.5 million, compared to $5.9 million in the prior-year quarter, which is classified as rental revenue in our condensed, consolidated statements of income. The remaining increase included increased sales volume of professional defibrillators, particularly in Canada, data management software and AutoPulse, slightly offset by a lower volume of AEDs.

International sales decreased approximately $1.9 million, or 8%, in comparison to the prior-year period, driven by the approximately $3 million negative impact of foreign exchange rate fluctuations on sales by our international subsidiaries. Therefore, on a constant currency basis, international sales volume would have increased by approximately 5% compared to the prior-year quarter. This increase was primarily attributable to our direct subsidiary in the UK and our distributor business in Latin America.

Total AutoPulse sales were approximately $4 million in comparison to $3.4 million in the prior-year quarter. The majority of this increase was in the North American pre-hospital market.

Gross Margins

Cost of sales consists primarily of material, direct labor, overhead, depreciation and freight associated with the manufacturing of our various medical equipment devices, data collection software and disposable electrodes. Material is the largest component of our products, comprising more than half the cost. Overhead includes indirect labor for such activities as supervision, procurement and shipping. Other components of overhead include such items as related employee benefits, rent and electricity. Our consolidated gross margin may fluctuate considerably depending on unit volume levels, mix of product and customer class, geographical mix, foreign exchange rate fluctuation and overall market conditions.

Gross margin for the three months ended March 29, 2009 decreased from 54% to 52%, compared to the same period in the prior year. Approximately 2% of the decrease was due to the impact of foreign exchange in the current quarter compared to the prior-year quarter. LifeVest partially offset this decrease with an increase in gross margin of slightly less than one percentage point. Other factors affecting the fluctuation in gross margin each individually represented approximately one percentage point or less of our overall gross margin. Our gross margin tends to fluctuate from period to period as a result of product and geographical mix.

Backlog

Backlog decreased to approximately $7.8 million at March 29, 2009, compared to approximately $8.3 million at the end of the prior quarter. Backlog was approximately $13.8 million at March 30, 2008. Typically, our backlog decreases during the first and second quarters, remains flat during the third quarter, and increases during the fourth quarter due to the purchasing practices of our customers. Due to possible changes in delivery schedules, cancellation of orders and delays in shipments, our backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.

Costs and Expenses

Operating expenses for the three months ended March 29, 2009 and March 30, 2008
were as follows:



                                  March 29,    % of       March 30,    % of      Change
    (000's omitted)                 2009       Sales        2008       Sales       %
    Selling and marketing        $    27,632      30 %   $    28,420      29 %       (3 %)
    General and administrative         7,993       9 %         8,119       8 %       (2 %)
    Research and development          10,116      11 %         8,549       9 %       18 %

    Total expenses               $    45,741      49 %   $    45,088      45 %        1 %

As a percentage of sales, selling and marketing expenses for the three months ended March 29, 2009 increased approximately 1% as compared to the three months ended March 30, 2008. This increase, as a percentage of sales, was primarily attributed to the lower volume of revenue compared to the prior-year quarter. The decreased dollar spending primarily reflected the impact of foreign exchange rates on foreign-denominated operating expenses of approximately $1.1 million and decreased commissions related to the lower revenue volume in the North American hospital market. The reductions were partially offset by increased personnel-related expenses for the LifeVest sales force and related sales organization, including commission, salaries and fringe benefits that are supporting the increased LifeVest revenue.

As a percentage of sales, general and administrative expenses increased slightly to 9% of sales as compared to 8% of sales for the three months ended March 29, 2009. General and administrative expenses were consistent with the prior-year period at approximately $8 million.

As a percentage of sales, research and development expenses for the three months ended March 29, 2009 increased approximately 2% compared to the three months ended March 28, 2008. Research and development expenses increased for the three months ended March 29, 2009 compared to the three months ended March 30, 2008, predominantly due to additional costs of approximately $1 million as a result of the strategic alliance with Welch Allyn.

Investment and other income (loss), net

Investment and other income (loss) net, includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. Investment and other income (loss), net totaled approximately $237,000 and $285,000 for the three months ended March 29, 2009 and March 30, 2008, respectively.

Income Taxes

Our effective tax rate for the three months ended March 29, 2009 and March 30, 2008 was 33% and 36%, respectively. The decrease in the effective tax rate is due to the increased benefit provided by the research and development tax credit on lower expected annual earnings.

Effective October 1, 2007, we adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). At March 29, 2009 and September 28, 2008, we had $3.3 million of gross unrecognized tax benefits, all of which, if recognized, would affect goodwill and our effective tax rate. Of the $3.3 million current-year balance, $1.2 million is expected to reverse in fiscal 2009. We recognize interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of income. We had $480,000 of accrued interest and penalties at March 29, 2009 and September 28, 2008.

We are subject to U.S. federal income tax as well as to income taxes of multiple state and foreign jurisdictions. We have concluded all U.S. federal and most state and foreign income tax matters through fiscal 2004.

We do not currently have any income tax audits in progress.

In the first quarter of fiscal 2009, we estimated that our fiscal 2009 effective tax rate would be approximately 35%. Based on our second quarter results and lower expected annual earnings, we now estimate that our fiscal 2009 effective tax rate will be approximately 33% before discrete period items.

Six Months Ended March 29, 2009 Compared To Six Months Ended March 30, 2008

Sales

Net sales by customer/product categories are as follows:



                                                        March 29,     March 30,
(000's omitted)                                            2009          2008       % Change
Devices and Accessories to the Hospital Market-North
America                                                 $   37,772    $   61,082         (38 %)
Devices, Accessories, and Data Management Software
to the Pre-hospital Market-North America                    86,255        73,413          17 %
Other Products to North America                             11,712        11,035           6 %

Subtotal North America                                     135,739       145,530          (7 %)
All Products to the International Market                    46,431        46,645           0 %

Net Sales                                               $  182,170    $  192,175          (5 %)

Net sales decreased 5% for the six months ended March 29, 2009 compared to the prior-year period.

Sales to the North American hospital market decreased approximately $23.3 million, or 38%, compared to the same period a year ago. This decrease primarily reflects curtailed spending by hospitals in response to the general economic downturn. The decrease was also attributable to a smaller volume of US Military/Big Government sales compared to the six-month period in fiscal 2008. The contract with the State of California in the prior year contributed approximately $8 million of the $14.7 million in sales to the US Military/Big Government, in comparison to a total of $7.0 million in U.S. Military/Big Government sales during the six-month period of fiscal 2009.

Sales to the North American pre-hospital market increased approximately $12.8 million, or 17%, compared to the same period in the prior year. The increase in North American pre-hospital market sales was primarily a result of increased volume in LifeVest revenue of approximately $8.2 million. Other contributors included increased volume in data management software sales, professional defibrillators, and AutoPulse sales, slightly offset by a lower volume of AEDs.

International sales remained relatively consistent with the same period in the prior-year. The negative impact of foreign exchange rate fluctuations on sales by our international subsidiaries, excluding Canada, totaled approximately $4 million. The increased volume of sales were driven by our direct subsidiary in the UK and our international distributors, namely in Europe and Latin America.

Total sales of the AutoPulse product increased 40%, with particularly strong growth in the North American pre-hospital market. Total AutoPulse sales were approximately $8.5 million in comparison to $6.1 million in the prior-year period.

Gross Margins

Gross margin for the six months ended March 29, 2009 increased from 51.4% to 52.2% compared to the same period in the prior year. Approximately two percentage points of the increase was due to the absence in the current-year of the low margin State of California order which adversely affected the gross margin for the prior-year period. This increase was primarily offset by approximately two percentage points due to the impact of foreign exchange rates. Other factors affecting the fluctuation in gross margin, each individually represented less than one percentage point of our overall gross margin, including the LifeVest business which contributed an increase to the overall gross margin of slightly less than one percentage point. Our gross margin tends to fluctuate from period to period as a result of unit volume levels, mix of product and customer class, geographical mix, foreign exchange rate fluctuation and overall market conditions.

Costs and Expenses

Operating expenses for the six months ended March 29, 2009 and March 30, 2008
were as follows:





                                  March 29,    % of       March 30,    % of      Change
    (000's omitted)                 2009       Sales        2008       Sales       %
    Selling and marketing        $    54,181      30 %   $    53,548      28 %        1 %
    General and administrative        15,626       9 %        15,729       8 %       (1 %)
    Research and development          18,085      10 %        16,381       9 %       10 %

    Total expenses               $    87,892      48 %   $    85,658      45 %        3 %

As a percentage of sales, selling and marketing expenses for the six months ended March 29, 2009 increased approximately 2% as compared to the six months ended March 30, 2008. This increase, as a percentage of sales, was primarily attributed to the relatively small incremental operating expense in the prior-year period associated with the revenue obtained from the State of California order. We did not receive a similar order in the current-year period. The increased dollar spending primarily reflected increased personnel-related expenses for the LifeVest sales force and related sales organization, including commission, salaries and fringe benefits that are supporting the increased LifeVest revenue, partially offset by the favorable impact of foreign exchange rates on foreign-denominated operating expenses of approximately $2 million.

As a percentage of sales, general and administrative expenses increased slightly to 9% of sales as compared to 8% of sales for the six months ended March 30, 2008. General and administrative expenses were consistent with the prior-year period.

As a percentage of sales, research and development expenses for the six months ended March 29, 2009 increased approximately one percentage point compared to the six months ended March 30, 2008. Research and development expenses increased for the six months ended March 29, 2009 compared to the six months ended March 30, 2008, due predominantly to increased costs related to the strategic alliance with Welch Allyn.

Investment and other income (loss), net

Investment and other income (loss), net includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. Investment and other income (loss), net totaled approximately $(632,000) and $678,000 for the six months ended March 29, 2009 and March 30, 2008, respectively. This decrease is primarily the result of the rapid strengthening of the US dollar during fiscal 2009 as we marked our short-term foreign denominated intercompany receivables to market at the end of the reporting period.

Income Taxes

Our effective tax rate for the six months ended March 29, 2009 and March 30, 2008 was 28% and 36%, respectively. During the first quarter of 2009, the U.S. Congress extended a research and development tax credit which was retroactive from January 1, 2008. The difference in our effective tax rate is due to a discrete U.S. research and development tax credit of approximately $400,000 recorded during the quarter ended December 28, 2008 for the retroactive portion of the tax credit and to a full-year projected tax credit for research and development in the 2009 annual rate calculation, as compared to only one quarter of a full-year credit in fiscal 2008.

Liquidity and Capital Resources

Our overall financial condition remains strong. Our cash, cash equivalents and short-term marketable securities at March 29, 2009 totaled $67.0 million, compared with $69.3 million at September 28, 2008. We continue to have no long-term debt. On May 4, 2009, we purchased substantially all of the assets of Alsius Corporation for a purchase price of approximately $12 million. See Note 15.

As we have previously stated, we have used cash, and it is possible we will use additional cash, to assist customers who transition to our products with various financing arrangements. We also may use cash to assist creditworthy customers with various financing arrangements as a result of the current difficult liquidity and credit environment.

Cash Requirements

We believe that the combination of existing cash, cash equivalents, and highly liquid short-term investments, together with future cash to be generated by operations and amounts available under our line of credit, will be sufficient to meet our ongoing operating and capital expenditure requirements for the foreseeable future. We believe we have, and will maintain, sufficient cash to meet future contingency payments related to the Lifecor and Infusion Dynamics acquisitions. We may also need to draw on these funds in the future for potential acquisitions.

Sources and Uses of Cash

To assist with the discussion, the following table presents the abbreviated cash
flows for the six months ended March 29, 2009 and March 30, 2008:



                                                      Six months ended          Six months ended
(000's omitted)                                        March 29, 2009            March 30, 2008
Net income                                            $           4,676         $           8,834
Changes not affecting cash                                       10,392                     9,629
Changes in current assets and liabilities                         5,924                   (13,030 )

Cash provided by operating activities                            20,992                     5,433
Cash used for investing activities                              (17,741 )                 (17,847 )
Cash provided by financing activities                               152                     1,529
Effect of foreign exchange rates on cash                         (3,052 )                     249

Net change in cash and cash equivalents                             351                   (10,636 )
Cash and cash equivalents - beginning of period                  36,675                    37,631

Cash and cash equivalents - end of period             $          37,026         $          26,995

Operating Activities

Cash provided by operating activities of $21.0 million for the six months ended March 29, 2009 increased $15.6 million compared to cash provided by operating activities for the six months ended March 30, 2008 of $5.4 million. The increase in cash provided by operating activities for the six months ended March 29, 2009 was primarily attributable to the decrease in cash payments for accounts payable and accrued expenses.

Investing Activities

Cash used in investing activities during the six months ended March 29, 2009 was consistent with the cash used in investing activities during the six months ended March 30, 2008. Payments of contingent consideration on prior period acquisitions decreased with the final earn-out payment to the shareholders of Revivant Corporation ("Revivant") in fiscal 2008. This decrease was partially offset by the $3.7 million paid through March 19, 2009 for the purchase of assets related to the Welch Allyn defibrillator products. Net purchases of marketable securities and property and equipment were consistent with the same period in the prior year.

Financing Activities

Cash provided by financing activities during the six months ended March 29, 2009 decreased approximately $1.4 million compared to the six months ended March 30, 2008. The change reflects a substantially lower number of stock options exercised during the current six-month period (options for 23,102 shares in the current period compared to options for 110,141 shares in the previous year period).

Investments

In March 2004, we acquired substantially all the assets of Infusion Dynamics. Under the terms of the acquisition, we are obligated to make additional earn-out payments through 2011 ("contingencies") based on performance of the acquired business. (See Note 8) Because additional consideration is based on the growth of sales, a reasonable estimate of the future payments to be made cannot be determined. As these contingencies are resolved and the consideration is distributable, we record the fair value of the additional consideration as additional cost of the acquired assets. Our earn-out payments, in the form of cash, for fiscal 2007 and 2008 were approximately $11,000 and $19,000, respectively. The annual earn-outs were accrued during the fiscal period when earned and paid out in the subsequent fiscal period.

We exercised our option to acquire Revivant, the manufacturer of the AutoPulse, on October 12, 2004. We paid $15 million in the form of cash and shares of our Common Stock as the initial merger consideration. Additional contingent consideration under the merger agreement was dependent upon certain clinical developments ("milestone payments") and increases in revenue through fiscal 2007 ("earn-out payments"). In December 2007, we paid approximately $3.6 million in cash and issued 220,864 shares of Common Stock in payment of the fiscal 2007 earn-out, which was accrued during fiscal 2007, to the former shareholders of Revivant. The December 2007 payment represented the contingent consideration due to the former shareholders of Revivant for the final earn-out period related to this acquisition.

We exercised our option to acquire the business and assets of Lifecor on March 22, 2006 and acquired the business and assets on April 10, 2006. We assumed Lifecor's outstanding debt (plus an additional $3.0 million owed to us, which was cancelled) and certain stated liabilities. We paid the third-party debt in April 2006. We agreed to pay additional consideration in the form of earn-out payments to Lifecor based upon future revenue growth of the acquired business over a five-year period. (See Note 8) Earn-out payments to Lifecor were made in the form of cash for fiscal 2007 and 2008 in the approximate amounts of $3.2 million and $4.5 million, respectively. The annual earn-outs were accrued during the fiscal period when earned and paid out in the subsequent fiscal period. Because additional consideration will be based on the growth of sales, a reasonable estimate of the total acquisition cost cannot be determined.

In October 2008, we announced a strategic alliance with Welch Allyn involving research and development, manufacturing, sales, service, and distribution related to Welch Allyn's defibrillator and monitoring products. During the first six-months of fiscal 2009, we paid approximately $4 million for the purchase of assets, which consist primarily of capitalized software, inventory and fixed assets, related to the Welch Allyn defibrillator products. We anticipate that the remaining elements of the strategic alliance will be implemented over the next several months in accordance with the transition plan. Total consideration for all elements could approximate $6 million.

Debt Instruments and Related Covenants

We maintain an unsecured working capital line of credit with our bank. Under this working capital line, we may borrow, on a demand basis, up to $12 million. This line of credit bears interest at the bank's rate of LIBOR plus 2% for short-term borrowings (2 - 3 months). For longer term loans, the line of credit bears interest at the rate of LIBOR plus 4% to 6%. No borrowings were outstanding on this line during fiscal 2008 or as of March 29, 2009. There are no covenants related to this line of credit.

Off-Balance Sheet Arrangements

. . .